REGULATION AND TAXATION ROUNDTABLE DISCUSSION
At approximately 10:40 a.m., the Regulation and Taxation Roundtable session commenced.
Commissioners present included Messrs. Alix, Shepard and Williamson. In addition, Stephen H.
Case, Advisor, served as moderator and he was assisted by Jennifer C. Frasier, Staff Attorney.
Participants included John Akin, Supervising Counsel with the California Franchise Tax Board;
Joyce Bauchner, Assistant Chief Counsel for General Litigation at the Internal Revenue Service;
Daniel Behles, a bankruptcy trustee with a solo practice in Albuquerque, New Mexico; Karrie
Bercik, an attorney from San Francisco and adjunct professor of law at Golden Gate University;
Mark Browning, Assistant Attorney General of the State of Texas; Stephen Csontos, Senior
Legislative Counsel with the Justice Department - Tax Division; Heidi Heitkamp, Attorney
General for the State of North Dakota; James Newbold, with the Illinois Attorney General Office;
Professor Grant Newton from Pepperdine University; and Mark Segal, of the law firm of Segal
& McMahon located in Las Vegas, Nevada.
Mr. Case began the discussion with a "philosophical" question: should
governmental creditors be treated any differently from other creditors and, if so, why? Answering
in the affirmative, Ms. Heitkamp said that the government entities, unlike the private sector, did
not choose its debtors. Ms. Bauchner added that government agencies were involuntary creditors
and that the Code recognized this difference. Mr. Browning, noting that government agencies
outside of bankruptcy have extraordinary powers that nongovernment creditors do no have, said
that the question should be whether the filing of a bankruptcy case should give debtors special
privileges that nondebtors do not have absent bankruptcy.
From the debtors perspective, Mr. Behles said that he had no problem with tax claims
being treated preferentially in bankruptcy and that he was interested in having as much of the tax
liability discharged or paid so that his clients fresh start meant something. He did not want
the governments ability to avoid the requirements of Section 362 to be expanded as
debtors needed a breathing spell to get their taxes paid and to make their tax return filings current.
Mr. Csontos noted that many consumer bankruptcy filings were no asset cases and that
governmental agencies were accordingly "stopped in their box." He said the
difference between the government and private sector creditor was that the former was a
representative of the public. Disagreeing with Mr. Csontos, Ms. Bercik stated that when a
business succeeded, society benefitted through the creation of jobs and payment of taxes. Ms.
Heitkamp was concerned about good taxpayers having to subsidizing those who did not pay and
abused the bankruptcy system through repeat filings.
Mr. Behles did not oppose refunds being credited against prepetition taxes, but he did not
want the government to interfere with ongoing reorganization efforts. He suggested that the
United States Trustee should play a more active role in monitoring the debtors
postpetition performance with respect to the payment of tax obligations and filing requirements in
chapter 11 and chapter 13 cases. He also noted chapter 13's failure to provide for dismissal with
prejudice. In response to Commissioner Alixs question as to whether the standing chapter
13 trustee monitored the debtors payment of postpetition taxes, both Mr. Browning and
Mr. Behles agreed that there was no uniformity. Mr. Browning said that it was ultimately up to
the taxing authority to perform this function.
Mr. Segal observed that many of his clients were "well-beaten up" by the time
they came to him and that usually the government had already seized their bank accounts and filed
nonconsensual liens against their property. Accordingly, he said that his clients needed chapter 13
to "level that playing field." Commissioner Shepard asked Mr. Segal whether the
governmental and private sector creditor should be treated equally. In response, Mr. Segal opined
that as his clients did not start out equally with their governmental creditors, he tried to make it
more equal. He stated that he was not opposed to government creditors receiving dividends larger
than other creditors.
Acknowledging that some government creditors had administrative collection powers greater
than virtually all other creditors, Mr. Newbold said that government creditors were among the
fewcreditors where the debtors informed them how much they are owed. In addition, he noted
that only one or two percent of all income tax returns were audited and that approximately 30
percent of income was unreported. Mr. Segal observed that a "great majority" of
debtors did tell the government what they owe and, if they did not, the government told them
what they owe.
The second "philosophical question" posed by Mr. Case to the participants was
whether it was fair for some people to escape their tax obligations through bankruptcy, while
others paid all of their taxes each year. Ms. Bauchner responded that the Internal Revenue Service
had many programs designed to permit people, suffering from hardship, to compromise their
liabilities. She said that the question should not be directed at those who really cannot pay their
taxes or were willing to work out an arrangement with the tax authorities. She stated that there
was "nothing wrong" with the Bankruptcy Codes spirit of compromise, but
her agencys proposals were addressed to other issues such as the failure to file returns and
the inability to setoff tax claims against refunds.
Mr. Behles said that he used chapter 13 to get his clients a better installment deal than the
Internal Revenue Service was initially willing to offer outside of bankruptcy. Commissioner Alix
observed that the chapter 13 process fostered speed and certainty. Mr. Behles also noted that
there was a "huge amount of variance" among the districts regarding offers to
compromise. Commissioner Alix, while acknowledging that there was greater public awareness
of the Services offer and compromise efforts, agreed that there were great variances in the
implementation of this process.
Commissioner Shepard asked whether it would be fair to require all debtors to pay taxes to
the best of their ability. Mr. Behles said that the bankruptcy system encouraged a higher rate of
repayment from debtors than from those not in the system as there was greater control and
oversight. He said that chapter 20 helped, rather than hurt the government. Mr. Browning
concurred and said that he received more efficient collections from chapter 13 debtors then from
chapter 7 debtors or others who did not file bankruptcy. He suggested that there should be
incentives to attract debtors into chapter 13 and that he was not "personally troubled"
by the concept of providing relief from interest payments in chapter 13 cases.
Commissioner Shepard asked whether there should be a requirement that 100 percent of a
debtors tax obligations be paid. Mr. Segal explained that his clients used chapter 13 as
their last resort after they have exhausted their offer and compromise options with the Internal
Revenue Service. In addition, his clients devoted all of their disposable income to fund plans that,
in turn, paid the taxing authorities. He did not think that an arbitrary amount such as 100, 60 or
40 percent minimum repayment should be decreed as long as the debtor was paying his or her
disposable income into the plan.
Ms. Heitkamp observed that the focus should be on the whole universe of taxpayers and
what the system is doing to encourage general good public behavior. Professor Newton said that
there should be economic or policy incentives that facilitate the fresh start process. A
"good" example of such an incentive was not requiring the debtor to pay interest in
Commissioner Shepard reiterated his concern about a system that required some taxpayers to
pay their taxes while it allowed others to avoid paying them. In response to Professor
Newtons query as to whether he objected to the Internal Revenue Services offer
and compromise program, Commissioner Shepard said that the Service "certainly can do
that." Professor Newton noted that he did not oppose priority status for tax claims in
bankruptcy and suggested that the consequences of this prioritization should be examined on a
case-by-case basis. While in many cases it may be justified, he said that there were some cases
where it would not be justifiable. Professor Newton and Commissioner Shepard agreed that
debtors should be required to repay their taxes to the extent of their ability and that rules should
be crafted to eliminate perceived abuses from the system.
Mr. Csontos observed that chapter 13 involved an issue of leverage. While outside of
bankruptcy the Internal Revenue Service controlled the amount that the debtor must repay,
chapter 13 gave that control to the debtor subject to confirmation standards, he noted. He said
that taxpayers should use the Internal Revenue Services administrative procedures. Mr.
Segal responded that the "great majority" of his clients chapter 13 were filed
because nothing could be worked out with the Internal Revenue Service.
The panelists who were debtors counsel then discussed the ratio of chapter 13 cases
they filed for their clients compared with compromises obtained from the Internal Revenue
Service. Commissioner Shepard referred to a study which revealed significant geographic
variations in the number of offers and compromises. Mr. Segal recalled that in the past it was a
"badge of honor" for a local district office to boast that it rejected all offers and
compromises. The situation, however, had changed over the past three years, he said. On the
other hand, he noted that the Internal Revenue Service had issued national standards that defined
the amount to be expended on food, clothing, personal grooming and housing. He said that in Las
Vegas the housing limit was $1,000, an amount that did not take into account utility expenses.
Given this rigidity, debtors found chapter 13 offered an alternative way to work out a repayment
plan. Recognizing that chapter 13 was a bankruptcy event that would appear as a "black
mark" on their credit reports for ten years, they tried to avoid filing for relief under chapter
13 "at all costs" and used this alternative only because they could not avoid it, he
said. Ms. Bercik agreed with this statement.
Commissioner Shepard said that in many cases taxpayers fund litigation to dispute their tax
liabilities yet fail to pay their taxes because they did not want to pay them as opposed to being
unable to pay them. Ms. Bercik said her clients were unable to pay their taxes.
Mr. Browning stated that there were "two absolute requirements" always
imposed by the tax authorities in all non-bankruptcy work outs. First, the taxpayer must be
current with all of his or her returns. Second, the taxpayer may not incur new liabilities while
paying off the old ones. If these requirements were imposed in bankruptcy cases, this would
eliminate abusers from the bankruptcy system, he suggested.
The Roundtable discussion then focused on 28 U.S.C. § 960. Mr. Csontos said that as
this provision was located in Title 28 of the United States Code, it seemed "to get lost in
the shuffle" insome bankruptcy cases. He suggested that the Bankruptcy Code should itself
reflect the sentiments set out in Section 960 and that it specify that a bankruptcy trustee or debtor
in possession was liable for federal and state taxes regardless of whether or not such trustee or
debtor conducted a business.
Mr. Behles did not oppose a provision being added to the Bankruptcy Code that required the
dismissal of a bankruptcy case would be dismissed if the debtor failed to timely file his or her tax
returns or pay postpetition tax liabilities.
Commissioner Alix then relayed two personal accounts of his experience with this issue. One
involved an operating moving and storage company for which the principals failed to pay any trust
fund taxes for two years prior to his involvement. Upon entering the case, Commissioner Alix
determined that the company owed $150,000 in back taxes and reported this to the local Internal
Revenue Service agent in Detroit. He explained to the agent that as part of the companys
rehabilitation, he wanted to work out a voluntary repayment plan. Pursuant to this arrangement,
payments in the amount of $2,000 per month commenced. The company then filed for relief under
chapter 11 and ultimately the case was converted to one under chapter 7. Thereafter, he was
served with a notice stating that he was a responsible person for the unpaid back taxes in the
amount of $150,000 and that a lien would be obtained against his assets. Rather than litigate the
issue, he agreed to settle the matter with the Internal Revenue Service for $40,000. Based on this
experience, Commissioner Alix said that there should be some protection for those professionals,
such as turnaround specialists, accountants and attorneys, who deal with troubled companies.
The second instance concerned Cardinal Industries, a bankruptcy case where he
served as the operating trustee. The debtor, consisting of more than 1,000 separate entities, had
operated in chapter 11 for nine months prior to his appointment as trustee. As trustee, he
determined that many of these entities had not paid their taxes. As there were insufficient funds in
the estate to pay these taxes, he was faced with the issue that he may have personal liability for
these taxes even though they were not incurred during his tenure. His alternative as a trustee was
to convert the case to one under chapter 7, liquidate the assets and "get out from under that
Agreeing with the concerns expressed by Commissioner Alix, Mr. Behles recounted a
chapter 7 case where he was appointed a successor trustee and the estate consisted of 300 gas
stations, most of which had environmental problems. As posited by Commissioner Alix, he said
that the manager of an estate should not be turned into a responsible person. In response to
Commissioner Shepards request for clarification, Commissioner Alix explained that the
trustee should have whatever liability attendant to the trusteeship, but should be immune from
whatever happened prior to his or her assumption of the trusteeship. Although Ms. Bauchner
alluded to certain case law which limited the extent of a trustees liability, Commissioner
Alix explained that there may be insufficient funds in the estate to fund such a defense.
Acknowledging that the rules ought to be clear on the extent of a trustees liability,
Mr. Csontos observed that government entities may be amenable to this concept and suggested
that it "would be well worth the effort" for the Commissions report to include
something that outlines thetrustees responsibilities and liabilities. Ms. Bauchner agreed
that clarity may provide everyone involved with the system a "better sense of
security" and serve to move the system forward.
Commissioner Shepard asked whether anyone disputed the requirement that chapter 11 and
chapter 7 estates file returns and pay taxes. Commissioner Alix explained that the issue involved
defining the period for which returns must be filed and who was responsible for the tax that
resulted from the filing of such returns. There was also the problem of having to complete returns
without having access to any records that supplied the information necessary to complete the
returns. Mr. Behles noted that many of his clients had tax liabilities because they did not keep
records. Mr. Browning suggested that a provision be crafted that limited a trustees liability
to the date of appointment and protect them from pre-appointment liability.
In the states that she worked in, Ms. Heitkamp explained that this did not occur as the
trustees good faith and best efforts to deal with any prepetition tax liabilities were
considered. Mr. Behles said that Commissioner Alixs "horror story" was not
an isolated event and suggested that a poll of chapter 7 and chapter 11 operating trustees would
reveal that everyone has experienced this problem.
The next topic discussed by the Roundtable panelists was Section 724 of the Bankruptcy
Code. Mr. Newbold stated that the main problem with this provision was that was difficult for tax
lienholders in chapter 13 and chapter 11 cases to determine whether to seek adequate protection.
If the case failed, the tax lien can be subordinated, for example, to fund unpaid chapter 11
administrative expenses. He likened it to being the "antithesis" of Section 506(c).
Professor Newton observed that the real problem was the systems inability to
determine whether a case was viable or not and asked whether the issue related to taxes or the
failure to assess a debtors viability. Commissioner Shepard said the problem involved
both. He posited that there were substantial Constitutional issues presented by this provision as it
constituted a form of taking and that it also had a "devastating" effect on local tax
revenue. Mr. Newbold observed that Section 724 did not improve the treatment of general
unsecured creditors. Professor Newton emphasized that unsecured creditors would not receive
anything in a case that was not viable, but would if it was liquidated. Ms. Bauchner noted that
Section 724(b) encouraged bankruptcy cases to continue longer than they should because it
protected administrative expense claimants. Nevertheless, she said as that the determination of a
businesss viability was not easy and required money, she was not sure who would perform
Commissioner Alix remarked that as Section 724(b) enabled trustees to pay their fees, hire
professionals and manage their estates, they may be "violently" opposed to its
elimination. Stating that he had been a panel trustee since 1982, Mr. Behles said that he had never
used the provision. Likewise, Mr. Newbold said that it was rarely used in the Northern District of
Illinois. He noted, however, that he had heard that it was used "all the time" in Texas.
Mr. Browning added that the application of Section 724(b) to individual debtors resulted in a
diversion of funds that would have ordinarily been allocated to pay nondischargeable taxes
secured by a lien on the debtors property.
The next area addressed by the Roundtable discussants concerned the allocation of the
burden of proof with regard to tax issues. Mr. Csontos suggested that there should not be any
difference in the way tax issues were determined by bankruptcy judges as opposed to how they
were decided by non-bankruptcy tribunals. He acknowledged that bankruptcy trustees must
administer cases with incomplete records and that small business debtors usually did not have
Commissioner Alix noted that debtors frequently did not know how much they owed because
they had not filed their returns and lacked records. While Mr. Behles agreed with Commissioner
Shepard that the debtor should have the burden of proof in those instances where the debtor has
filed tax returns, he averred that the tax authority should be required to prove the reasonableness
of its estimated claim. Ms. Bauchner explained that when the tax authority filed an estimated
proof of claim, this was the best it could do based on the information available.
Ms. Heitkamp said that an incentive is created for debtors who have not filed their tax
returns to seek bankruptcy relief because there was still a question about who had the burden of
proof. Mr. Behles said that he never had a client file for bankruptcy in order to shift the burden of
proof on a disputed tax return to the Internal Revenue Service.
Ms. Bauchner explained that as the tax system was premised on voluntary compliance, very
conscious decisions had been made about who should have the burden of proof based on who had
the information. Bankruptcy, she observed, did not change this premise.
The panelists then discussed the issue as it applied to trustees. Commissioner Alix agreed
with Ms. Bauchner that an objection to an estimated proof of claim should have some basis other
than to extract a settlement or to cause delay. Commissioner Shepard described a case where the
debtor, consisting of corporations and partnerships, had the records, but not the funds to enable
the trustee to determine the exact amount of the debtors tax liability. Observing that she
was "usually very pro-debtor," Ms. Bercik said that assigning the burden to the
government would encourage irresponsibility and forum shopping. Commissioner Alix expressed
concern with those cases where the trustee had insufficient funds to prepare the missing tax
returns. Mr. Behles observed that where there were insufficient funds to dispute a claim and there
would be a de minimis benefit to the general unsecured creditors in the case, then the
trustee should not bother objecting to the tax claim.
The next issue discussed by the Roundtable panelists was whether the "super
discharge" of chapter 13 should be amended so that it did not apply to tax claims. With
regard to the prior issue, Mr. Segal agreed that the burden of proof should be the same in
bankruptcy as it was outside of bankruptcy. Nevertheless, with regard to the scope of the chapter
13 discharge, he said that only those claims where the government met its burden of proving fraud
should be excepted from discharge. He said that the mere allegation of fraud by the Internal
Revenue Service was sufficient to establish fraud and thereby prevent the taxpayer from using
chapter 7 because the practical effect was that the taxpayer cannot afford to litigate the fraud
issue. While he agreed in principal that fraud should not be dischargeable in bankruptcy, the
government should be required to prove its case. Ms. Bauchner noted that if there was an
assessed liability with a fraud penalty, this meant that the issuehad already been litigated in tax
court or the taxpayer had received his or her statutory notice and signed off on it. Mr. Segal
averred that his clients generally had not previously litigated the issue and many failed to exercise
their administrative rights because they lacked counsel.
Mr. Behles observed that the tax creditor had much more "economic clout" than
the typical taxpayer who was a bankruptcy debtor. This may support the reallocation of the
attorneys fees incurred in a successful defense, similar to that available to debtors under Section
523(d), he argued. Ms. Bauchner said that there were provisions that awarded fees where the
governments position was not substantially justified.
Mr. Csontos expressed concern with a bankruptcy system that permitted debtors who were
not current in the filing of their tax returns to obtain a discharge of their tax liabilities. Mr. Segal
explained that when the non-filer was brought into the bankruptcy system, he or she was offered
the "carrot" of chapter 13 and, more importantly, the system encouraged the filing of
returns for periods that would otherwise be dischargeable. He said that his clients voluntarily paid
100 percent of their priority tax claims, although the percent paid to non-priority tax claims
depended on the debtors disposable income.
In response to Commissioner Shepards query, Mr. Segal said that many of his
clients plans paid zero percent to general unsecured creditors. Commissioner Shepard then
asserted that this made chapter 13 a "tax haven" for taxpayers who have not filed
their returns. They can accrue eight to ten years of outstanding returns and then have to pay only
for three years in a bankruptcy case, he observed. Mr. Segal responded that employment taxes
were not dischargeable and that he was "somewhat disturbed" by the references to
"recidivists." He asked the Commissioners to identify clearly who these recidivists
were and whether they were business people "jumping in and out" of bankruptcy to
save their businesses as opposed to the typical wage earner who may have lost his or her job and
could not make the first chapter 13 case work. Commissioner Shepard said that Bankruptcy Judge
Polly Higdon has maintained statistics for the state of Oregon and that the Southern District of
California had "rampant problems" with serial filings to forestall foreclosure.
To determine whether there was any consensus on this issue, Mr. Case asked each of the
panelists to summarize their positions. Mr. Segal said he was not in favor of eliminating the super
discharge for "non-filers" and that fraud was the only exception that he supported,
provided the government was able to prove it. Mr. Newbold recommended that having all
prepetition returns filed should be a requirement for confirmation of chapter 11 and 13 plans. In
addition, he said that there should be an exception to the super discharge for fraud and for failing
to file tax returns. The only issue that Mr. Behles raised with respect to this recommendation was
that there should be some statute of limitations for those situations where, for example, the debtor
did not file returns for more than twenty years. Commissioner Shepard disagreed with this
suggestion as it would protect tax protestors and that he did not have "much
compassion" for debtors who fail to file returns.
The Roundtable panelists then discussed the issue of serial filings. Mr. Behles asked whether
any of the tax government representatives objected to a debtor using chapter 20 primarily for
thepurpose of enabling the debtor to repay. In response to Mr. Cases request for
clarification, Mr. Behles explained that this would pertain to a debtor who first filed a chapter 7
case to eliminate all other unsecured debts and then filed a chapter 13 case to pay the
nondischargeable tax liabilities and obtain a chapter 13 discharge. Ms. Bauchner observed that
there was much geographical disparity across the country with respect to serial filings; in some
districts it was a problem, while in others it was not.
Professor Newton said that there was "something wrong" with a system that
required the filing of two bankruptcy cases to address a problem. Nevertheless, he was not
opposed to the concept. He then discussed possible solutions to the problem, such as redesigning
chapter 13 so that it allowed creditors to benefit from the debtors future income by
providing tax incentives to the debtor. One such incentive, he suggested, was not having to pay
Ms. Bercik inquired whether the problem presented by serial filings impacted on tax interests
or foreclosure efforts. Ms. Heitkamp said the system perpetuated refiling and permitted people to
avoid their public responsibilities. Commissioner Shepard discussed the concept of suspending the
three-year period under Section 507(a)(8) during the pendency of the prior bankruptcy case. As a
solution to avoiding serial filings, Mr. Segal suggested eliminating the bifurcated aspect of the $1
million eligibility limit for chapter 13. Mr. Behles supported this suggestion. Mr. Browning was
not sure if there should be an "absolute bar" on repeat filings and recommended that a
bankruptcy judge could apply a "material change of circumstances" test based on the
facts of the case. The panelists then discussed whether there should be a time limit and, if so, what
it should be.
Mr. Csontos wondered why it was necessary to eliminate the bifurcation between secured
and unsecured debt for chapter 13 eligibility purposes. Mr. Segal said that the interest and
penalties can cause the tax claim to exceed the current $250,000 limit for unsecured debt.
Commissioner Shepard expressed concern that this would protect the tax shelter investor who hid
taxable income for many years. Mr. Segal said he did not like the term "dishonest
taxpayers" as only those who commit fraud were defined to be dishonest by the tax system.
In response to Commissioner Shepards query, Professor Newton discussed the
possibility of having a taxable gain when property is abandoned. Both he and Commissioner
Shepard agreed that chapter 18 was not a proper use of the Bankruptcy Code. Ms. Bercik
addressed the possibility of reclassifying the status of the tax claim in the chapter 11 case that
results from a sale of estate property from administrative expense to priority.
The next issue discussed at the Roundtable session pertained to the setoff of tax obligations
against tax refunds. As the current system required a motion to assert this setoff, Ms. Bauchner
explained that the result was very expensive and time consuming for everyone involved. In those
districts where the Internal Revenue Service had standing orders, the system worked well, she
observed. Ms. Bercik, while not opposed to allowing prepetition refunds to be setoff against pre-
or postpetition taxes, questioned whether the tax authorities would allow other creditors to setoff
their claims and whether this constituted a voluntary payment that the debtor could direct its
allocation. Ms. Bauchner responded that the proposal was limited in scope and did not involve an
issue of allocation. Ms. Bercik said that her only concern was that the government was allowed to
obtain funds that other creditors should be getting. Ms. Bauchner also noted that the concept did
not involve an issue of whether the payment was voluntary or involuntary. Agreeing, Ms.
Heitkamp explained that although the system was voluntary as it was self-assessed, there were
"involuntary consequences" when the taxpayer did not voluntarily comply.
The last issue addressed by the Roundtable panelists was whether a debtor should be
required to file all tax returns as a condition of obtaining the benefits bestowed by the Bankruptcy
Code. Mr. Segal expressed concern about the word "all" as he thought there should
be some limitation on the number of years. He said that many people did not have the records and
sometimes the Internal Revenue Service did not have these records as well. He suggested that the
reach back period be defined at some specific point. Ms. Heitkamp noted that wage earning
information could be obtained from social security records. Commissioner Shepard was
concerned that a "bright line" could establish a "goal for the tax evader."
Professor Newton said that the issue did not concern the dischargeability of debt, but related to
getting the information for the filings. Accordingly, he thought six years may be a
"reasonable period." Mr. Csontos observed that there had to be some balance
because the proposal would enable the Internal Revenue Service to avoid filing "thousands
At the conclusion of Mr. Csontos remarks, Mr. Case brought the Roundtable
discussion to a close at approximately 12:49 p.m.
CONTINUED OPEN FORUM
At approximately 2:00 p.m., Chair Williamson reconvened the afternoon session.
He announced that the meeting would begin with those open forum speakers who could not be
heard earlier that day.
Ray Valdes, appearing on behalf of the National Association of County Treasurers and
Finance Officers, said his Association represented "probably the widest group of people
affected by legislation in the bankruptcy area." He explained that property taxes were the
"life blood" of local governments revenue stream. If a major contributor to
this revenue source can avoid or delay its property tax payment for a long period, this can have a
dramatic impact at the local level, he said. For instance, small counties may have to curtail
educational programs and firefighting services. He noted that Section 724(b) was
"especially disadvantageous" to local governments. To document the problems
associated with this provision, Mr. Valdes stated that his Association and the National
Association of Attorneys General conducted a national survey and that the results would be
submitted to the Commission. He said that the governments postpetition taxes should not
subsidize the debtors payment of its prepetition creditors. He summarized that taxes and
special assessments by local governments should be exempted from inclusion in a bankruptcy case
or should be treated moreequitably.
Commissioner Shepard asked Mr. Valdes to explain how Section 724(b) impacted on local
education and firefighting programs. Mr. Valdes said that the nonpayment or delay in the payment
of local property taxes had a direct effect on the budget for counties and municipalities and, in
turn, caused them to have to redirect their resources.
Chair Williamson inquired whether Mr. Valdes had difficulty collecting property taxes
assessed against real estate or personal property sold either in bankruptcy or outside of
bankruptcy. Mr. Valdes responded that there were reported cases emanating from the Middle
District of Florida where, for example, the bankruptcy judge authorized the sale of tax certificates,
but reduced the interest rate to eight percent. This ruling affected all of the investors who
purchased the tax certificates and changed the revenue stream for the county. In addition, he
mentioned that judges had "stayed the taxes" during the pendency of bankruptcy
cases. He concluded his presentation by recommending that a parcel number be supplied for real
property interests listed in any bankruptcy estate as it was very difficult and time consuming to
research these interests when the parcel number was not disclosed.
MARY ROMERO AND THOMAS FORD
Ms. Romero and Mr. Ford appeared on behalf of the California Association of County Tax
Collectors. Mr. Ford began his remarks by noting that California was "under attack"
since the enactment of the Bankruptcy Reform Act of 1978 and the
9th Circuits ruling in Glass. He said that
more than 85,000 claims representing more than $83 million in taxes were filed in bankruptcy
cases by California counties last year. He also mentioned that California was a unique state in that
it has Proposition 13 that restricted the taxes on assessed property.
Ms. Romero said that the statistics that Mr. Ford referred to did not include Los Angeles
County which received 150 bankruptcy cases per day. She explained that the revenues generated
by property taxes fund hospitals, schools, police and fire protection services. Where there was a
loss or delay in the payment of these taxes, essential services had to be downsized, she observed.
She mentioned one town where funding for the school district, fire and police protection, and
road maintenance was reduced by 25 percent as a result of the two-year delay in the payment of
postpetition taxes by a local company that filed for relief under chapter 11. In response to Chair
Williamsons question as to whether any efforts were made to collect these monies, Mr.
Ford said that several attempts were made, but as the case was pending in Houston, Texas, it was
burdensome given the number of times the towns attorney had to appear. Another
example was then discussed.
Among the specific concerns that Ms. Romero cited was the need for improved noticing
requirements, the necessity for counties to increase their borrowing as a result of reduced
property tax collection, and the fact that local taxes were not receiving the priority that they were
intended to receive in bankruptcy cases. She suggested that the noticing requirements for
adversary proceedings under Bankruptcy Rule 7004 should be clarified regarding their
applicability to state and localgovernments. In addition, she observed that Section 506(b) neither
provided for the state interest rate nor attorneys fees. Further, she said that postpetition
taxes should have priority status under Section 507(a)(1) because the fees of professionals were
usually paid during the pendency of the case before any tax payments were made. She explained
that certain bankruptcy judges have held in rem property taxes to be unsecured.
Moreover, she said bankruptcy judges could redetermine tax liabilities pursuant to Section 505(a).
Finally, she said that debtors used Section 1129(b)(2)(A)(2) to stretch out payments for "as
long as they want."
Ike Shulman, President of the National Association of Consumer Bankruptcy Attorneys,
initially discussed the dischargeability of tax debts, a topic considered at the Regulation and
Taxation Roundtable Session that he attended earlier that day. Specifically, the issue was whether
the chapter 13 "super discharge" provisions should be changed to prevent the
discharge of tax obligations. He strongly opposed preventing debtors with unfiled tax returns
from obtaining a discharge under chapter 13. He said that substantial payments, amounting to
$230 million, were made to taxing authorities through the chapter 13 process for the fiscal year
ending last September. Commissioner Shepard asked what was the amount of claims discharged.
Although Mr. Shulman did not know, he said that it was also not clear what would have been
collected outside of chapter 13. He said that many of these debtors would not have been eligible
for chapter 13 relief if they had been required to pay 100 percent of their taxes. He said that the
government benefitted from the chapter 13 process by having these debtors re-enter the tax
system and pay their priority taxes in full.